What Is a Call Debit Spread?

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A call debit spread — also referred to as a bull call spread or a long call spread — is an options trading strategy that allows traders to try to benefit from a bullish outlook while limiting both risk and reward. It involves purchasing a call option while simultaneously selling another call option with a higher strike price and the same expiration date.

Essentially, the call debit spread consists of a long call combined with a short call as a hedge to reduce risk. The strategy’s level of risk is well defined, but it also has limited profit potential.

This options strategy may allow traders to benefit from increases in underlying asset prices.

Call Debit Spread Definition

Like some other common options strategies, call debit spreads may be traded out-of-the-money (OTM), at-the-money (ATM), or in-the-money (ITM).

To understand this strategy, it helps to review the basics of call and put options. The basic steps of the strategy are:

•   Purchase a call option

•   Sell a call option with a higher strike price

The reason they are called debit spreads is because the trader incurs a debit (cost) equal to the price of the purchased call option, minus the price of the sold call option when they enter the trade. The closer the strike prices are to the price of the underlying asset, the higher the debit payment is. But a higher debit also means a higher potential profit.

If the underlying stock closes below the strike price of the long call (the lower strike price), the investor’s entire initial cost (debit paid) is lost.

Recommended: Guide to Writing Put Options

Entering and Exiting a Call Debit Spread

To enter a call debit spread, a trader purchases a buy-to-open (BTO) call option and a sell-to-open (STO) call option that has a higher strike price and the same expiration date. The way the trade is structured, the trader is paying a debit. A call debit spread can be entered at any strike price.

If a trader is more bullish, they can choose to purchase a spread that is more out-of-the-money. By selling the call option with the higher strike price, the trader gets into the trade at a lower cost and defines their risk and profit level.

To exit a call debit spread, the trader sells-to-close (STC) the long call option and buys-to-close (BTC) the short call option.

Traders can adjust their trade before the option’s expiration date, but will pay an additional amount to do so, potentially increasing their risk and lowering their profit potential due to added costs.

Additional flexibility exists in the ability to roll out spreads to a later expiration date. A trader might choose to do this if the option’s underlying asset price hasn’t moved enough to make the trade profitable.

In order to do this, the trader can sell the bull call spread they own and buy a new spread that has an expiration date further in the future. This may increase the potential for profit, but the trader will incur additional costs, which can also add risk to the trade.

This is just one of many strategies traders can consider when thinking about how to trade options today.

Call Debit Spread Examples

Let’s look at two examples.

Example 1

A stock is currently trading at $100 per share. A trader initiates a call debit spread by purchasing a $103 call for $1.00 and simultaneously selling a $105 call for $0.40. This creates a net debit.

The maximum loss and net debit for this call debit spread is the premium paid, which is:

   Net premium paid = Cost of Long call – Cost of Short Call

   Premium paid = $1.00 – $0.40 = $0.60 net debit

   Note: The $0.60 net debit is per share. Since an option contract is for 100 shares, the debit will be $60 per option contract.

The maximum profit for this call debit spread is:

   Maximum profit = Width of strike prices – Premium paid

   Maximum profit = ($105 – $103) – $0.60 = $1.40 per share, or $140 per option contract

The breakeven point for this trade is when the stock price reaches:

   Breakeven = Strike price of long call + Premium paid

   Breakeven = $103 + $0.60 = $103.60

Example 2

A trader buys a $50 call option for $3.50 and sells a $55 call option for $1.50, resulting in a net debit of $2.00 Their maximum loss is $200, which will occur if the stock closes below $50 at expiration. If the stock option closes above $55, the trader will profit $300. The trader will break even at a closing price of $52.

The maximum loss and net debit for this call debit spread is:

   Premium paid = $2.00 ($3.50 for the long vall minus $1.50 for the short call)

The maximum profit for this call debit spread is:

   Maximum profit = Width of strikes – Premium paid

   Maximum profit = $55 – $50 – $2 = $3 per share or $300 per option contract

The breakeven point for this trade is when the stock price reaches:

   Breakeven = Strike price of long call + Premium paid

   Breakeven = $50 + $2 = $52

Maximum Gain, Loss, and Break-Even for Call Debit Spread

The maximum profit for a call debit spread is:

   Width of Strikes – Premium (Debit) paid

The maximum profit for a call debit spread is:

   Premium paid

The break-even point for a call debit spread is:

   Premium paid + Strike price of the long call

Recommended: How to Trade a Bull Put Spread

Why Trade Call Debit Spreads?

Traders use the call debit spreads option strategy when they expect a moderate rise in the price of an asset.

Traders may use the call debit spread to gain exposure to an asset’s potential price increase without having to purchase it outright. This strategy provides defined risk and requires lower capital than buying the asset itself.

Traders also use the strategy as a way to hedge against the risk of volatility collapse. If volatility collapses in a long call position, this can go poorly for an investor. But with the structure of a call debit spread, changes in volatility don’t have much effect.

Call Debit Spread Tips

Here are some tips for trading call debit spreads and some additional factors to be aware of before opening your first call debit spread.

Sensitivity to Theta (Time) Decay

One factor that impacts call debit spreads is time decay, or theta decay. Theta is one of the Greeks in options trading and refers to the gradual loss of an option’s value as it approaches expiration.

If the underlying asset price is near to or below the long call (lower strike price) the trade will decrease in value as the expiration date nears. However, if the asset price is near to or above the short call (higher strike price) the trade will increase in value as the expiration date nears.

If the asset price is near the middle of the strike prices, time decay of the long and short call is offset and time erosion will have little impact on the price of the call debit spread.

Closing Call Debit Spreads

Closing a call debit spread before expiration may help lock in profits, especially if the trade has reached its maximum potential gain.

Another reason to close a call debit spread position as soon as the maximum profit is reached is due to the risk of your short call being assigned and exercised. To avoid this situation, you may close the entire call debit spread position or keep the long call open and buy to close the short call.

If the short call is exercised, a short stock position is created. You can close out the position with stock in your account, buy back stock in the market to close out your short position, or exercise the long call. Each of these options will incur additional transaction fees that may affect the profitability of your trade, hence the need to close out a maximum profit position as soon as possible.

Call Debit Spread Summary

Below is a summary of the key factors involved in a call debit spread:

The Takeaway

A call debit spread allows traders to define both risk and profit potential while taking a bullish position on the underlying asset.

If a trader wants to take a long position on an asset, but not have to buy the asset itself, they can use the call debit strategy — which gives them exposure to the asset with less risk and lower capital requirements.

It’s also possible to use this strategy in options trading as a way to hedge against the risk of volatility collapse.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

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